U.S. companies forced to correct accounting failures would have to reclaim a portion of bonuses awarded to corporate bosses under a rule proposed Wednesday by the Securities and Exchange Commission.
The SEC measure, passed on a 3-2 vote, would expand the circumstances under which executives could be punished if their firms restate past earnings. Companies would have to claw back stock or cash bonuses based on erroneous results even if it wasn’t intentional.
The change would build on rules -- approved more than a decade ago in response to fraud at Enron Corp. and WorldCom Inc. -- that permitted clawbacks only when it could be shown that books were cooked intentionally.
“Executive officers should not be permitted to retain incentive-based compensation that they should not have received in the first instance,” SEC Chair Mary Jo White said in a statement before the vote.
Companies restated financial results 831 times in 2014, according to an April report by Audit Analytics. About 42 percent of the restatements took a bite out of the company’s bottom line, according to the report. The others didn’t affect the company’s earnings but required correcting balances for shareholders’ equity, cash flow or other accounts.
The SEC proposal also would cover a wider group than the earlier rules, which applied only to chief executive officers and chief financial officers. The new plan would claw back pay from any executive involved in preparing erroneous figures, including a firm’s top accounting officer and vice presidents in charge of functions such as sales, administration or finance.
“Investors should not be left holding the bag while executives reap benefits when reporting false financial results,” said Commissioner Kara Stein, a Democrat who voted for the plan.
Under the plan, companies would be required to disclose the total amount of pay forfeited after a restatement without naming the executives. If an executive required to forfeit pay hasn’t given it back after 180 days, the company would have to disclose the name of the person and the amount owed.
Republican commissioners who opposed the plan said it could create perverse incentives. Executives may seek higher salaries to compensate for the risk that incentive pay could be clawed back, said Commissioner Michael Piwowar.
“Subjecting a broad swath of executive officers to a no-fault recovery mandate creates the potential for substantial injustice,” said Commissioner Daniel Gallagher, also a Republican.
Companies that don’t adopt clawback policies could have their shares delisted by stock exchanges under the proposed rule, the SEC said. More than 85 percent of companies in the S&P 500 Index already have clawback policies more stringent than existing SEC standards, said Carol Bowie, director of research at Institutional Shareholder Services.
JPMorgan Chase & Co. two years ago clawed back more than $100 million in pay from managers who oversaw a $6.2 billion trading loss. The bank said it invoked its own clawback policy in taking back pay previously granted to executives responsible for what came to be know as the London Whale trades.
Michael Laphen, former chief executive officer of Computer Sciences Corp., agreed last month to return more than $3.7 million over his role in accounting fraud that occurred in 2010 and 2011. CSC had manipulated accounting models to hide a drop in earnings after it failed to meet deadlines for a contract with the U.K.’s National Health Service, the SEC said. The largest restatement in 2014 was KBR Inc., which was forced to reduce net income for 2013 by $154 million.
The proposal is the last major executive-compensation rule the SEC must issue under Dodd-Frank. Companies will have 60 days to comment before the agency can take final action.